Blogs

Operating Costs Flat for Third Consecutive Year

Calendar-year 2015 marks the third consecutive year that fleet operating costs have remained stable compared to the past three years, primarily due to the continuing softness in gasoline and diesel prices.

Fuel represents approximately 60 percent of a fleet’s total operating costs, so the price per gallon of fuel has a dramatic impact on overall fleet costs. The past three years have been heaven-sent for the fleet industry overall; however, it has had a dramatic impact on fleets operated by energy companies, which are scrambling to cut costs to offset the decline in fuel prices.

In addition to lower prices at the pump, these cost reductions have been amplified by the ongoing trend by fleets to downsize to smaller vehicle segments and spec’ing smaller displacement engines, when applicable, along with increased driver training to eliminate “fuelish” driving behaviors.

Despite lower fuel costs, corporate sustainability programs remain strong at large multinational fleets. Although there may be less pressure for alternative-fuel vehicles, the focus continues to be to acquire the most fuel-efficient models that can fulfill the fleet requirement. In addition, new-model vehicles tend to have higher mpg ratings than predecessor models, due to light-weighting, the proliferation of higher-speed transmissions, and more efficient powertrains. The increased implementation of telematics systems has also resulted in increased route optimization and easier identification of drivers who are engaging in driving behaviors that are decreasing mpg.

Another trend in calendar-year 2015 has been the narrowing of the price gap between gasoline and diesel. Historically, diesel prices have been lower than gasoline, but this changed in 2005 when per gallon diesel prices surpassed gasoline, but, as this year has shown, that gap is diminishing. One corollary advantage is that lower diesel prices have exerted upward pressure on higher resale values for light-duty trucks. The price of fuel has a causal relationship with resale values, with lower fuel prices benefiting lower mpg vehicles, and higher fuel prices benefiting smaller, more fuel-efficient vehicles.

The forecast from the U.S. Energy Information Administration (EIA) of the U.S. Department of Energy, along with the oil futures market and most fleet observers forecast that per-barrel oil prices in 2016 will remain near 2015 prices, which bodes well for fleet operating expenditures. The prediction is that global supply and demand for oil will remain at today’s levels, which will keep downward pressure on fuel prices. Another important variable is that, over the past decade, the percentage of imported oil has continued to drop with the increase in domestically sourced oil. This has lowered the impact of price volatility in oil-producing regions mired in political instability. For instance, the recent turmoil in Syria, Yemen, and Venezuela resulted in minimal price volatility in the U.S; which, in the past, most likely would have resulted in pricing gyrations.

Tire Prices to Remain Stable

The second highest operating cost is replacement tires, which have been stable in 2015 compared to 2014. The key reason has been the ongoing softness in commodity prices, primarily rubber and oil. A key contributor to the softness in commodity prices has been the sluggish Chinese economy, which was a voracious consumer of raw materials. The hope among fleets is that ongoing softness in oil prices will exert downward pressure on tire prices. Also, the importation of lower-cost tires has contributed to putting downward pressure on tire prices; however, the recent U.S. tariff on Chinese tires will result in higher prices for some manufactuer products.

Maintenance Costs to Remain Flat

Increased maintenance intervals have contributed to lower maintenance costs for fleets. In 2015, the multitude of safety recalls by OEMs, and the resulting parts shortages, triggered in an uptick in maintenance costs primarily due to extended downtime and the need for higher replacement vehicle rental expenses. The widespread use of just-in-time manufacturing has created situations where demand exceeded production capacity and created unforeseen downtime waiting for parts deliveries. In addition, there has been a general uptick in parts pricing. However, vehicle quality continues to remain high, helping to offset these expenses.

One area that is putting upward pressure on maintenance costs is labor. But, maintenance still represents a relatively small segment of overall operating costs; representing just 10 percent of total operating costs. In order for maintenance to have a dramatic impact on total operating costs, it would require far more significant increases than what we have seen in the past, nor what is anticipated to occur in the future.

Let’s keep our fingers crossed that 2016 may be the fourth consecutive year of stable operating costs.

The recent U.S tax law changes created a problem for employers who use a non-accountable vehicle reimbursement plan. Negative feedback has some companies reconsidering the viability of offering company-provided vehicles to help key employees mitigate the adverse impact of eliminated tax deduction.

A truck’s total cost of ownership (TCO) covers a specific range of expense variables, regardless of the make or model. The four lifecycle categories that influence TCO are fixed costs, operating expenses, incidental costs, and depreciation/resale value. A key factor that drives these lifecycle categories is a vehicle’s service life.

Most in procurement take the position that fleet’s primary responsibility is to buy assets and services, which annually can range from millions to tens of millions of dollars in expenditures. This amount of corporate spend requires it be managed by someone with superb negotiation skills and proven procurement acumen.

If you want to provide added value to your company, you need to view fleet as a business and not simply an aggregation of assets to be managed cost-effectively. The fastest way to improve your bottom line is to increase fleet utilization, which increases the productivity of each individual truck.

Blog: Vocational trucks are susceptible to being targeted for staged accidents, which involves maneuvering an unsuspecting employee driver into an intentional crash in order to make a false insurance claim or to file a lawsuit against the driver’s employer.

If you think being a fleet manager is stressful, try being a Navy SEAL. Former Navy SEAL Robert O'Neill, best known for claiming to have shot Osama bin Laden, recently wrote a new book entitled, “The Operator.”

Conventional wisdom in the fleet market is often wrong. If we roll back the calendar, the conventional wisdom about fuel prices was that there would be ebbs and flows in price per gallon rates, but the overall price trajectory would trend upward. The flaw with conventional wisdom is that it only works when no new variables are inserted into future projections. A case in point is the shale oil revolution, which now has experts predicting oil prices will remain flat for the foreseeable future.

Summer is a busy time in fleet. There’s an abundance of next-model-year OEM fleet meetings, new-model intros, and industry conferences, which offer ample opportunities to “talk fleet” with the movers and shakers of our industry. If you want to know what's happening in the fleet market, you need to talk with fleet managers -- lots of them.

Senior management exerts intense pressure on fleet managers to control and/or reduce vehicle acquisition and operating expenses. To accomplish this, a fleet managers can pursue three different cost-control strategies — cost savings, cost deferral, or cost avoidance. In order to implement a successful cost-control strategy you need to institutionalize the mechanisms to curb money-wasting behaviors.

To be successful on a sourcing team, you need to be open-minded about exploring all available service channels and partners. However, open-minded doesn’t mean being open-headed. You must listen and entertain new ideas, but also temper such a practice and attitude with pragmatism and knowledge.